Is the mining downturn over?

IS THE MINING DOWNTURN OVER?

The 2010 mining investment boom is paying off with some miners in the box seat to take advantage of the upturn.

Higher commodity prices and the cautious spending habits of Australia’s mid-tier mining firms herald a turning point, with many predicting the days of the downturn might be over.

However, concerns are growing that miners are not moving fast enough to find new deposits and there doesn’t seem any urgency to tackle the problem.

According to PwC Australia’s Aussie Mine report, which looks at 50 of the nation’s largest ASX mining companies with a market capitalisation of less than $5 billion, the sector now has a golden opportunity to prosper in this new environment.

The report found revenue of the mid-tier miners was up on average 15 per cent, with operating costs flat, while impairments are at their lowest levels since 2011. Conditions have driven the highest EBITDA margins recorded in more than a decade, at 34 per cent, and a return to a collective net profit for the MT50, the first in five years. “Some miners are reaping the success of having plotted their moves in difficult times, putting them in the box seat to take advantage of the recent upturn,” the report says. Others are still wary from “the experience of having the wisdom of capital allocation decisions seriously questioned”.

The coal sector jumps off the page, despite the prevailing news of its death, gold is still a star but lithium has seen a lot of growth

“In 2010 we had what was described as an unprecedented mining investment boom, where companies spent a truckload of money on capital, creating capacity to expand operations,” he says.

“It takes so long to get the capital in place and then prices initially drop because there is more capacity and the balance of supply and demand.

Now that increased capacity has allowed companies to either increase production at constant costs or benefit from the ongoing rise in prices without having to increase costs because the capital base is in place. Not many industries can get that outcome.”

However, he warned that there needs to be a focus on finding new deposits. “None of this growth is coming from new discoveries or new mines. We need to see the replacement of reserves as they are being diminished and this has been a problem for quite a while.”

The report found capital expenditure had increased 35 per cent (excluding MMG’s capex reduction) in the past year, primarily focused on brownfield and expansion projects. Available cash was pumped into debt repayments, up 64 per cent on 2016, and the level of new debt issued almost halved. Investors welcomed the 41 per cent increase in dividend payments, but with operating cash flows up 33 per cent and cash on hand increasing almost $1 billion, the report suggests shareholders may be left wanting more.

Dodd says the coal sector was a big improver, with the most growth in terms of market capitalisation.

“The coal sector jumps off the page, despite the prevailing news of its death, gold is still a star but lithium has seen a lot of growth,” he says. “There are two new lithium entries to the mid-tier, with a further five companies in the top 50 ASX-listed miners, driven by the growth in battery and mobile technologies. We are into the next phase of the economic clock where you can expect to see good returns, increased activity, increased inflows.”

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